IBUS 302:

International Finance
Topic 13-International Bonds
Lawrence Schrenk, Instructor
.

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Learning Objectives
1.

2.

3.

Describe the general characteristics of

international bond markets.
Explain the classification of international
bonds.
Explain the types of instruments available in
the international bond market.

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International Bond Markets

International

bond markets are NOT unified

into a single market (like FX and
Eurocurrency market).
International Bonds are viewed as substitutes
to Domestic bonds.

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Market Demographics
Bond

Market Segments: Domestic Bonds,

Foreign Bonds, Eurobond
Total market value of the worlds bond
markets are about 50% larger than the
worlds equity markets.
Denominations:
1. U.S. $ = 47% (46% of international)
2. Euro = 18%
(23% of international)
3. Yen = 19% (4.0% of international)
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Classification
Domestic Bond Market
Foreign Bond Market
Internal

Global Bond Market

International

EuroBond Market
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External /
Offshore

Domestic Bonds
Issued

by domestic entity
Denominated in that countrys currency
Corporate

IBM issues $ denominated bonds in USA

Governments:

Treasury Bonds (USA)

Gilts (UK)
Bunds (Germany)

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Domestic Bonds: Review

Key Variables

Principal, Par Value, Face Value

Coupon, Coupon Rate
Maturity (t)
Discount Rate (r)
Periods (per year), (m)

Coupon
1
PV
1
r

m
m

ParValue
tm
tm

r
1
m

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Domestic Bonds: Review

Premium

versus Discount Bonds

Features

Callable Bonds
Convertible Bonds
Sinking Funds

Debt

Covenant

Financial Ratios
Technical Default
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Foreign BondsType I
Issued

by foreign entity
Outside the country where the entity resides
Denominated IN THE currency of the country
where issued
Example:

Toyota issues $ denominated bonds in USA.

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Foreign BondsType II
Issued

by foreign entity
Outside the country where the entity resides
Denominated in currency OTHER THAN
THAT of the country where issued
Example:

Toyota issues Yen denominated bonds in USA

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Foreign BondsType II

Who are the potential investors for such a bond?

Toyota issues Yen denominated bonds in USA
Hedger:

Your Firm imports from Japan and has Yen A/P

Yen bond interest you receive is used to pay Yen A/P on
your imports. Like a forward contract

Speculator:

Speculate that Yen will appreciate (buy more $)

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Global Bonds
Similar

to Foreign bonds, but

Simultaneously issued in many different
countries.
Denominated in 1 or many currencies.
Registered in each market where issued.

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EuroBonds
Issued

outside the country in bond is

denominated (same as second type of
foreign bond)
OR, issued in same country, but only to nonresidents
Not Registered, i.e., Bearer Bonds
Example:

Toyota issues Yen-denominated bonds in

offshore market.
EUROYEN Bond
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Bond Return of Foreign

Currency Bonds
RETURN

= local currency return

+ foreign exchange return
= YTM + %change in spot exchange rate

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Comparing Yields on US
Bonds and Eurodollar Bonds

U.S. Bonds pay semiannual coupons

Eurobonds pay annual coupons
Bond Equivalent Yield (BEY) of Eurobond
= 2[(1 + YTM on eurobond)1/2 - 1]

Example:
YTM on Eurobond = 10%.
BEY = 2[(1.1).5 -1] = 0.09762 = 9.762%

Thus, Eurobonds must offer higher yields (all else is

equal).
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Summary of Features Affecting

Eurobond Yields
Yield impact

Eurobond Feature

Tax Free Interest

+
+

Registration and Regulation

Annual Coupons
Quality of Issuer

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Types of Instruments
Straight

Fixed Rate Debt

Floating-Rate Notes
Zero Coupon Bonds
Equity-Related Bonds
Dual-Currency Bonds

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Straight Fixed Rate Debt

Plain

Vanilla Bonds
Typically have annual coupons.
Since most Eurobonds are bearer bonds,
coupon dates tend to be annual rather than
semi-annual, less costly for issuer.
The vast majority (71% in 2002) of new
international bond offerings are straight fixedrate issues.
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Floating-Rate Notes
Coupon

rate reset every 6 or 12 months

Eurobonds commonly use LIBOR as
reference rates
LIBOR = London Interbank Offer Rate
Usually pay quarterly or semiannual coupons

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Zero Coupon Bonds

No

Explicit Interest Paid

Issued in one of two ways:

At a discount to face value

Issued as a zero at a 50% discount to $100 face value

in 4 years
Yield = 18.9%

At face value, but pay a premium at maturity

Issue at $100 (Face Value), Pay $200 in 4 years

yield = 18.9%
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Equity-Related Bonds
Convertibles

Allow the holder to convert bond in exchange for

a specified number of shares in the firm of the
issuer (or for some other specified commodity).

Bonds

with Equity Warrants

Allow the holder to keep his bond but still buy a

specified number of shares in the firm of the
issuer at a specified price.

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Dual-Currency Bonds
Fixed-rate

bond

Price and interest in one currency.

Principal in another currency.

Japanese

firms have been big issuers with

coupons in yen and principal in dollars.
Good option for a MNC financing a foreign
subsidiary.
Straight Bond + Forward Contract on FV
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Credit Ratings
Corporate

Fitch IBCA, Moodys and Standard & Poors sell

credit rating analysis.
Focus on default risk, not exchange rate risk.

Sovereign

Debt

Debt

Assessing sovereign debt focuses on political risk

and economic risk.
Sovereign debt is the obligation of a countrys
central government.

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International Bond Market Indices

There

are several international bond market

indices.
J.P. Morgan and Company

Domestic Bond Indices

International Government bond index for 18
countries.
Widely referenced and often used as a
benchmark.
Appears daily in The Wall Street Journal
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